Britain's biggest companies could have easily filled the £40 billion pension black hole — but chose not to

Britain's 100 biggest listed companies have a £60 billion hole in their pension schemes.Mark Kolbe/Getty ImagesMore than half of FTSE 100 companies struggling with big deficits in their pension plans paid out more in dividends to shareholders last year than the value of the shortfall, according to a new report.

Of the 56 FTSE 100 companies that had a funding shortfall in their pension scheme at the end of last year, 29 paid out more in dividends than the value of the deficit.

Consultancy LCP says in its annual "Accounting for Pensions Report" that this "suggest[s] that these companies could pay off their pension scheme deficit relatively easily if they wanted to."

In short, Britain's biggest corporations decided it was a better idea to give billions in profits to investors than take care of mounting pension problems that will hit its staff in years to come.

LCP found that the 56 corporate giants with pension schemes in the red collectively paid out 25% more than their combined deficit: £53 billion in dividends, against a £42.3 billion black hole.

FTSE 100 companies also paid out around 5 times more to shareholders than they invested in their struggling pension schemes, with just £13.3 billion going towards future pensioners.

"The collapse of BHS and the potential sale of Tata Steel UK, both with underfunded pension schemes, have highlighted the significance of pension liabilities and the impact that a large defined benefit scheme can have on a UK company. Companies with large deficits may see pressure from the Pensions Regulator on their dividend policy in light of the Select Committee's report into BHS."

The 'defined benefit' problem

The failure by FTSE 100 companies to tackle the mounting pension crisis is getting even costlier for these firms. The BBC reports that LCP says its estimate for the FTSE 100 pension deficit has now risen to £63 billion, due to falling yields on bonds meaning funds have to put up more money to make the returns on investment they need.

The problem is with something called a "defined benefit" pension scheme, also known as a final salary pension scheme. This is where employees are promised a specific monthly payout when they retire, based on their age, tenure, salary, and linked to rates of inflation. It's the Rolls-Royce of pensions.

For employers, the idea is they make enough money through investing pension contributions to be able to fund these sort of sweet deals. But with interest rates and bond yields collapsing since the financial crisis, as the below chart from stockbroker AJ Bell shows, that's getting increasingly difficult. They have to shovel more money into a pit that's getting deeper and deeper. AJ Bell

However, what's interesting about LCP's report is it shows most of the biggest companies can afford to make these payments. Whether they will is another question.